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Be Smart When Hiring a Tax Preparer

Each year, more than half of all taxpayers pay a professional to handle the preparation of their tax return. (Since married couples count as one filer, the individual total is actually much higher.) It is no secret that the American tax system is difficult to navigate, a situation unlikely to change despite repeated efforts to simplify the tax laws. The last major effort to overhaul the system, the Tax Reform Act of 1986, was promoted with simplification as one of the key goals, yet despite significant major changes to the law, the system's overall level of complexity changed very little. In fact, by some measures it is more complicated now than it was in 1985.

Each person will have their own reasons for choosing to use a professional preparer, but one common concern is the time requirements. The IRS estimates that the average non-business filer will require about 16 hours per year to deal with preparing his or her own return. (If you are self-employed or rent property to others, the average jumps to 24 hours.)

The desire to avoid expensive mistakes is also a motivating factor for many people. Each year, the IRS finds many tax returns where errors caused filers to underpay their tax bill, resulting in penalties and interest. However, many people do not realize that the IRS is generally not proactive in seeking out errors where people have overpaid their taxes. Every year our preparers see new clients whose previously filed returns overlooked provisions that cost them hundreds or even thousands of dollars. (This includes people who used tax preparation software.)

Of course, hiring a professional preparer is not without a level of risk. Preparers must access some of your most sensitive financial information and must be dedicated enough to stay informed on our ever-changing tax laws. On their website, the IRS provides some tips on choosing a preparer you can rely on.

First, ask about your preparer’s credentials and continuing education. Enrolled Agents have passed an IRS competency exam and are required to spend an average of 24 hours each year on tax-related education. CPAs have also passed an exam and have education requirements, but are not required to participate in annual tax-related education. Find out what designation your preparer has and how much tax-related education they attending in the previous year.

Make sure that your preparer has obtained an IRS identification number (a “PTIN”) and that he or she will be including his information, including his id number, in the “paid preparer” block of your return. If you pay someone to prepare your return and they leave this block blank (or it says “self prepared”), you should find a new preparer immediately.

Before you begin, make sure you understand how you will be charged for your tax return. Avoid preparers who base their fee on a percentage of your refund or who promise to get you a larger refund than other preparers. Also, make sure you understand what is claimed on your return before it is filed. Your preparer should explain to you everything that it contains, because you are the person ultimately responsible for everything claimed on your return, whether you used a preparer or not.

The law requires that virtually all professional preparers file your return electronically, which is the safest and most accurate way to file. If a preparer insists that you file your return on paper, it may be a red flag. (Some preparers are exempt from “e-filing” on religious grounds or other narrow exceptions, and there are certain cases where a return must be filed on paper.) Preparers are also legally prohibited from depositing your refund (or any portion of it) directly into their own bank account.

Finally, never sign a blank return or tax form, including an electronic filing authorization, and never sign anything before you have received a copy of your completed return. You should also make sure that your preparer is available year-round to answer questions or provide assistance in the event you receive an IRS or state tax notice. Preparers operating in New York are required by law to provide you with their year-round contact information.

This communication is strictly intended for individuals residing in the states of AZ, CA, CO, CT, DE, FL, GA, IN, MA, MD, ME, MN, MT, NC, NH, NJ, NM, NV, NY, OH, OR, PA, RI, SC, TN, TX, UT, VA, VT, WA, WI, WY. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services. Investments are not FDIC- or NCUA-insured, are not guaranteed by a bank/financial institution, and are subject to risks, including possible loss of the principal invested. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through CES Insurance Agency or Brent Financial Group, LLC.